Introduction
The South African government,
understandably enough after decades of international
isolation, is very keen to encourage foreign direct
investment (FDI) into South Africa, and offers a range
of taxation and other incentives in order to entice
international (and in some cases domestic) investors.
Here we will be looking at some of the major initiatives
set up by the new regime: Industrial Development Zones
(IDZ) and the Small and Medium Enterprise Development
Programme (SMEDP), and a range of incentives offered
for manufacturing start-ups. The
Enterprise Investment Programme was launched by the
government in July 2008, to provide sector-specific
financing in order to encourage growth in key areas.
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Industrial
Development Zones
Industrial Development
Zones (IDZs) are purpose-built industrial estates providing
facilities and services tailored for export-oriented
industries. They are linked to international airports
or ports, and run along similar lines to Export Processing
Zones, which fall outside of domestic customs zones,
and so are able to import items free of customs and
trade restrictions, add value, and then export. Sites
already earmarked for, or actually being used as IDZs
include Richmond, East London, Durban, Coega, Saldanha,
and the Johannesburg international airport.
New investments locating
in an IDZ can expect several benefits:
- Attractive regulatory
regime and investment facilitation services provided
by zone operators;
- Duty free imports of
capital goods and inputs, plus VAT exemption for exports;
- Access to the government's
incentive mechanism;
- Effective infrastructure
IDZs usually consist
of two zones of operation:
- Customs Secured Area
(CSA). A delimited area with entrance and exit points
controlled by customs personnel, and a dedicated customs
office providing rapid inspection and clearance.
- Industries and Services
Corridor (ISC) Adjacent to the CSA, and occupied by
service providers to the export-oriented enterprises
located in the Customs Secured Area.
On January, 23, 2012, a
Special Economics Zone Policy and Bill were gazetted
by the Minister for Trade and Industry, inviting the
public to comment on the proposal with a deadline of
March, 22, 2012.
The proposals specifically
target the creation of Sepcial Economic Zones (SEZ)
in the underdeveloped regions in the country. Under
the proposals, an IDZ will be classed as a type of SEZ
and regulated by an SEZ board instead of via the Manufacturing
Development Act. The Bill further aims to provide for
the designation, development, promotion and management
of SEZs, the regulation of applications and permits
and the establishing of an SEZ fund.
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Small and Medium
Enterprise Development Programme (SMEDP)
N.B. The SMEDP was suspended on
August 31, 2006. No applications for the SMEDP programme
were accepted after this date and existing guidelines
apply only to applicants accepted into the scheme prior
to August 31, 2006.
The SMEDP is a programme
designed to generate employment, and create opportunities
for the introduction of new and advanced skills to South
Africa, as well as to encourage foreign investment in
the country. One of the programmes it offers provides
incentives for those planning to expand existing South
African based enterprises, or to start new projects
in a range of sectors, including manufacturing, tourism,
business services, information and communications, technology,
and high value agricultural projects.
Eligible projects can
claim an annual tax free cash grant of up to 10% of
the qualifying investment cost, paid over two or three
years if a labour usage criteria is met. The rates for
assistance are as follows:
- First R5 million ($630,000
approx) investment 10% per annum
- Next R10 million ($1.26m approx) investment 6% per
annum
- Next R15 million ($1.89m approx) investment 4% per
annum
- Next R20 million ($2.52m approx) investment 3% per
annum
- Next R25 million ($3,15m approx) investment 2% per
annum
- Next R25 million investment 1% per annum
Another incentive, offered
to businesses with approved training programmes, is
the Skills Support Programme, which can be accessed
simultaneously with any other investment or competitiveness
programmes. The SSP offers a three-year grant to the
value of up to 50% of the cost of training new staff
as the result of an expansion or new project. It also
offers a capital grant for training equipment and course
materials.
The government is also
very keen to stimulate domestic investment, as it believes
that this is the key to foreign investment, as international
investors, to a certain degree, follow the sentiment
and mood of their domestic counterparts. To this end,
a number of Spatial Development initiatives (SDIs or
'Investment Corridors') have been set in place to establish
conditions that will be attractive to both domestic
and international investors. SDIs have tended to be
established outside the major industrial centres, and
offer private/public partnerships designed to encourage
economic growth, and create jobs in areas such as tourism
and agriculture. However, the incentives offered to
investors in these initiatives are 'soft' incentives,
for example links with local suppliers, red tape reduction,
etc, and as such will probably appeal more to domestic
enterprises than international investors.
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Incentives For Manufacturing
Start-Ups
A company which incorporated
on or after October 1, 1996 contemplating carrying on
a manufacturing project as its sole business, may be
awarded a tax holiday, up to a maximum of six years,
if the project meets certain conditions. The project
may consist of one or more of three components, namely
a spatial component, an industry component and a human
resource component.
The company must apply
to the Regional Industrial Development Board for the
approval of its project before it will be granted the
tax holiday status. Such status consisting of a zero
rate being applied to taxable income.
For each component certified
by the board, the company will be entitled to the tax
holiday status for two consecutive years. The tax holiday
status will commence in the first year in which the
company has a taxable income and will lapse ten years
after the project was approved.
Existing entities will
not qualify for the tax holiday. Additional information
may be obtained from the:
The Department of Trade
and Industry (DTI)
Private Bag X 86
Pretoria
0001
Tel: (012) 394 9500
Fax: (012) 394 9501
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Strategic
Investment Projects
The
Strategic Investment Project program offers a tax allowance
of up to 100 percent (a maximum allowance of R600 million
(app. $100 million) per project) on the cost of buildings,
plant and machinery, for strategic investments of at
least R50 million (app. $85 million).
Although
there was a delay in implementing the scheme, the trade
and industry department announced in April 2002 that
the R3-billion Strategic Investment Projects (SIP) incentive
scheme had come on stream after finalising the criteria
for the evaluation of projects. The incentive was broadly
welcomed by investment analysts and consultants.
The
Department of Trade and Industry said at the time: "The
incentive represents an innovative step by government
to attract private sector investment in profitable and
wealth-creating entitities into SA, from both local
and foreign entrepreneurs. The SIP will support industrial
projects investing at least R50m in qualifying industrial
assets. These projects are expected to increase production
within the SA industry and have a potential for long-term
sustainability."
The
SIP incentive programme provides tax credits equal to
between 50% and 100% of the cost of qualifying projects,
with a points system being used to assess the value
of individual projects.
The SIP incentive is accessible to industrial projects
participating within the following sectors:
- Manufacturing
of products: all listed manufacturing activities excluding
tobacco and tobacco related products;
-
Computer and computer related activities: hardware
consultancy, software consultancy and supply, data
processing (excluding standard secretarial services),
and database activities;
-
Research and development activities: research and
experimental development on natural sciences and engineering
The proposed project should:
-
Comprise investment in new qualifying assets equal
to or exceeding R50 million;
-
Increase annual production of the relevant industry
sector within South Africa;
-
Not substantially displace products or jobs in the
relevant sectors;
- Demonstrate
long term commercial viability;
-
Promote employment and production in the same economic
sector in which the project is to be established;
-
Not concurrently be benefiting from certain other
schemes as per the relevant legislation.
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The
Enterprise Investment Programme
The
Enterprise Investment Programme was launched by the
government in July 2008, to provide sector-specific
financing in order to encourage growth in key areas.
The
scheme currently operates under two sub-programmes –
the Manufacturing Investment Programme (MIP) and the
Tourism Support Programme (TSP – though further
sub-programmes are expected to be added in the future
to address the needs of other specific sectors.
The
EIP works through an investment grant of between 15%
and 30% towards qualifying investment in plant, machinery
and equipment and customised vehicles required for establishing
new or expanding existing production facilities or upgrading
production capability in existing clothing and textiles
operations.
The
MIP is designed to stimulate investment into the manufacturing
and related services sectors as part of the government’s
efforts to create further employment and ensure sustained
growth within the industry.
The
programme aims to encourage further investment into
the industry by providing a grant of up to 30% towards
qualifying investment below R200m in plant, machinery
and equipment and commercial vehicles required for establishing
new and expansions of existing operations.
Although
the MIP can be accessed by a range of sectors in the
manufacturing industry, the government is focusing on
four key sectors that it has identified as having the
most potential for achieving its growth objectives:
Metal fabrication, Capital and Transport equipment;
Automotive and components; Chemicals, plastic fabrication
and pharmaceuticals; and Furniture sectors.
The
aim of the TSP is to specifically promote sustainable
job creation outside of the traditional tourism destinations
of Durban, Cape Town and Johannesburg, as well as encouraging
greater transformation in the sector.
The
government has chosen to support the tourism sector
as it remains vital to the South African economy, contributing
close to R100bn to GDP, and has relatively low entry
barriers providing real potential to grow the SMME segment.
Whilst
many SMMEs have entered the tourism sector, particularly
ahead of 2010, most remain small and do not expand into
medium sized businesses, thereby limiting their job
creation capacity.
The
TSP offers a grant of up to 30% of qualifying capital
investment by enterprises investing below R200m, provided
the enterprises are located outside the three established
tourism areas.
The
grant can be used by applicants as part of their equity
contribution when approaching third party partners and
may also be used to access further loans from banks.
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Other
Investment Incentive Schemes
The
South African government has introduced a number of
other schemes designed to encourage investment in certain
industries, including:
Critical
Infrastructure Programme (CIP)
This
programme provides subsidised support for economic infrastructure
required for committed productive investments, including
new or expanding existing projects. It also assists
companies with a top-up grant, with funding ranging
from 10% to 30% of the qualifying development costs.
The
scheme aims to:
- Improve
the competitiveness of South African industries;
- Achieve
economic growth and create employment;
- Support
the development of industrial activities tat have
strategic economic
advantage for South Africa;
- Achieve
a geographical spread of economic activities within
South Africa
and prioritise rural and economically depressed areas.
Private
sector enterprises, private /public partnerships, industrial
development project operators, strategic Investment
programme applications and investors in strategic economic
projects may apply for assistance under the scheme.
The following qualifying costs may be claimed for:
- Costs
incurred directly in the installation, construction
and erection of infrastructure;
- Remuneration
costs incurred by the applicant for payment of employees
undertaking project work;
- Costs
of materials directly consumed during the installation,
construction and erection of the infrastructure;
- Cost
of new capital items, e.g. test equipment.
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Technology
and Human Resources For Industry Programme (THRIP)
The
Technology and Human Resources for Industry Programme
(THRIP) is a partnership programme, which challenges
companies to match government funding for innovative
research and development in South Africa. Managed by
the National Research Foundation (NRF) on behalf of
the Department of Trade and Industry (the dti), THRIP
focuses on projects that specifically promote and facilitate
scientific research, technology development and technology
diffusion,
or any combination of these.
All projects funded by THRIP must include human resource
development, but
the choice of technological focus is left to the industrial
participants and their partners. The industry and the
dti share the costs – and therefore the risk –
of developing commercial technology on a R2 to R1 basis
(industry: the dti). the dti’s support may be
doubled if a project supports certain THRIP priorities.
Funding
takes place in the following ways:
- Firms
and THRIP invest jointly in research projects where
project leaders are on the academic staff of South
African Higher Education Institutions (HEIs)
- THRIP
matches investment by industry in projects where researchers/experts
from Science, Engineering and Technology Institutions
(SETIs) serve as project leaders and students are
trained through the projects
- Technology
Innovation Promotion through the Transfer Of People
(TIPTOP) schemes promote the mobility of researchers
and students between the industrial participants,
HEIs, and SETIs involved in joint projects. Four TIPTOP
schemes are available, namely:
- The
exchange of researchers and technology managers
between HEIs, SETIs and industry.
- The
placement of SET graduates in firms, while they
are working towards a higher degree on a joint
research project.
-
The placement of SET graduates in small, medium
and micro enterprises (SMMEs).
- The
placement of SET skilled company employees within
HEIs or SETIs.
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Support
Programme for Industrial Innovation (SPII)
The
programme, administered by the Industrial Development
Corporation of South Africa, promotes technology development
in the manufacturing and IT industry through innovation
of new products and processes. All private sector firms
and commercialised state owned companies, which incur
direct costs in the development of innovative new products/processes
qualify for the funding.
The SPII is focussed specifically on the phase that
begins at the conclusion of basic research (at the stage
of proof of concept) and ends at the point where a pre-production
prototype has been produced.
Support
is provided in the form of product process development,
a matching scheme and a Partnership Scheme:
- Product
process development: Financial assistance is provided
for small, very small and micro enterprises in the
form of a grant of between 65% and 85% of the qualifying
cost incurred during the technical development stage
with a maximum grant amount of half a million Rand
(R500,000) per
project. For enterprises with more than 25% black
shareholding, the grant is 65%, for enterprises with
between 25% and 50% black shareholding, the grant
amount is 75%, and for enterprises with black shareholding
of more than 50%, the grant amount is 85%.
- Matching
scheme: This is a conditional grant that is repaid
by means of levy sales. Financial assistance is provided
to SMEs with more than 200 employees, a turnover of
more than R51 million, and assets less than R19 million,
in the form of a grant of up to 50% of the qualifying
cost incurred during the technical development stage
up to a maximum grant amount
of one and a half million Rand (R1,500,000) per project.
- Partnership
scheme: Financial assistance is provided in the form
of a conditionally repayable grant of 50% of the qualifying
cost incurred during development activity, with a
minimum grant amount of one and a half million Rand
(R1,500,000) per project, repayable on successful
commercialisation of the project. In considering support
for a project under SPII, there should be a clear
indication of the causality (additionality) that will
follow from the support.
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National
Industrial Participation Programme – NIPP
The
programme seeks to leverage economic benefits and support
the development of South African industry through government
procurement. The programme is targeted at the South
African industries, enterprises, and suppliers of goods
and services to government/ parastatals, where the imported
content
of goods and services equals to or exceeds US$10 million.
The primary customer of NIPP is the South African industry
that benefits through the NIPP business plans which,
when implemented generate new or additional business
activities through one or more of the following: investment,
export opportunities, job creation, increased local
sales, SMME and BEE promotion, research and development
and technology transfer. The secondary customer of the
NIPP is the foreign supplier who benefits from the programme
through increased participation in the South African
economy. In the case of foreign customers, the
imported content of the purchase or lease contract for
goods and services must equal to or exceed US$10 million
to qualify for participation. In the case of South African
industries, participation is dependent on enterprise
capability to satisfy the requirements of both the programme
and the foreign supplier.
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Film
incentives
A
large Budget Film and Television Production Rebate Scheme
has been
introduced where an eligible applicant will be rebated
a sum totalling 15 percent for foreign productions,
or 25 percent for qualifying South African Productions.
This includes official co-productions of the Qualifying
South Africa Production Expenditure (“QSAPE”)
that the applicant has spent on an eligible film production.
The objective is to provide additional financial incentives
for the production of both foreign and domestic large
budget film and television projects in South Africa.
In establishing the rebate, the government recognises
that large budget film productions contribute to South
Africa’s economic development and international
profile by providing valuable economic, employment and
skill development opportunities for the South African
film production industry.
The rebate will ensure that South Africa remains competitive
in attracting large budget film productions from abroad.
A finite sum has been allocated over an
initial three-year period. The maximum rebate for each
project will be R10 million in order to attract an optimum
number of productions.
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Export
Marketing & Investment Assistance Scheme (EMIA)
The EMIA Scheme partially compensates exporters and
investors for costs incurred in respect of activities
aimed at developing export markets, and assists with
the facilitation of investments into South Africa. Any
assistance provided under the EMIA Scheme is at the
discretion of the CEO of Trade and Investment South
Africa (TISA).
Eligible applicants for the scheme are:
-
South African based manufacturers of products including
small, medium-sized and micro enterprises (SMMEs),
previously disadvantaged individuals (PDIs) and other
businesses
- South
African export trading houses
- South
African commission agents representing at least three
SMMEs or
previously disadvantaged individuals (PDI)-owned businesses;
and
- South
African export councils, industry associations and
joint action groups
representing at least five South African entities.
Entities/divisions/subsidiaries
forming part of a group, joint venture or partnership
will qualify for EMIA assistance at the discretion of
the EMIA Scheme.
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Large
Industrial Investments
In
July 2010, the South African Treasury gazetted regulations
relating to tax incentives, as announced by Minister
of Finance Trevor Manuel in the 2008 budget, in support
of the government’s industrial policy strategy.
The
regulations define the pre-requirements for an industrial
policy project to qualify for the tax incentives and
the point scoring system applicable to brownfield and
greenfield projects. Prerequisites include energy efficiency,
skills development and investment size requirements.
Under
the points system, an industrial policy project will
achieve “qualifying status” if it achieves
at least five out of a total of 10 points and a “preferred
status” if it achieves at least eight out of a
total of 10 points. Qualifying status projects may deduct
from their taxable income an additional 35% of the costs
of the investment in manufacturing assets, up to a maximum
of R550m (USD54m). Preferred status projects may deduct
an additional 55% of the cost of the investment in manufacturing
assets, up to a maximum of R900m. An additional training
allowance of R36,000 per employee may be deducted from
taxable income. The maximum total additional training
allowance per project is R20m in the case of a qualifying
project and R30m in the case of a preferred project.
To
qualify for the incentives, investment projects must
also adhere to minimum standards of energy efficiency
and spend at least 2% of their total wage bill on training
and skills development. There is a R200m ceiling on
greenfield investments, and a R30m limit on brownfield
investments (or the lesser of R200m or 25% of the value
of existing assets).
Investors
will not, however, be able to avail of these incentives
if they are benefiting from other government programmes,
such as the Enterprise Investment Programme.
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